Q4 2023 Corporate Office Properties Trust Earnings Call

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Operator: Welcome to the COPS Defense Properties fourth quarter and full year 2023 results conference call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Venkat Komaneni, COP Defense's Vice President of Investor Relations. Mr. Komaneni, please go ahead.

Welcome to the cops defense properties fourth quarter and full year 2023 results conference call.

As a reminder, today's call is being recorded at this time I will turn the call over to Ben Cat come in any cop defenses, Vice President of Investor Relations. Mr. <unk>. Please go ahead.

Abigail: Thank you, Abigail. Good afternoon, and welcome to COP Defense's conference call to discuss the fourth quarter and full year. With me today are Steve Budorick, President and CEO, Britt Snyder, Executive Vice President and COO, and Anthony Mifsud, Executive Vice President. Reconciliations of GAAP and non-GAAP financial measures that management discusses are on the website, in the results press release and presentation, and in our supplemental As a reminder, forward-looking statements made during today's call are subject to certainties, which are discussed in our Chief. Good afternoon, and thank you for joining us.

Thank you Abigail good afternoon, and welcome to Cop defenses conference call to discuss fourth quarter and full year results with me today are Steve <unk>, President and CEO, Britt Cider executive Vice President and CFO.

And ethylene as executive Vice President and CFO reconciliations of GAAP and non-GAAP financial measures that management discusses are available on our website in the results press release and presentation and in our.

Our supplemental information package as a reminder forward looking statements made during today's call are subject to risks and uncertainties, which are discussed in our SEC filings actual events and results can differ materially from these forward looking statements and the company does not undertake a duty.

Steve.

Good afternoon, and thank you for joining us.

Venkat Komaneni: Our strategy concentrating investments in assets that support priority U.S. national defense missions once again in 2023 generated exceptionally strong results driven by strong vacancy and new development leasing, Superior Tenant Retention, a highly pre-released development pipeline, and Significant Value Creation from delivering fully leased new properties, all of which is supported by our prudent balance sheet management. Since 2019, we've generated compound annual FFO per share growth of 4.5% due to these attributes.

Our strategy.

Trading and investments in assets.

Priority U S national transformations once again in 2023 generated exceptionally strong results driven by strong vacancy and new development and leasing.

Superior tenant retention.

We pre leased development pipeline.

And significant value creation from delivering fully leased new properties.

All of which is supported by our prudent balance sheet management.

Since 2019, we've generated compound annual <unk> per share growth of four 5% due to these attributes.

Stephen E. Budorick: Our total portfolio is 95.3% leased. Our defense IT portfolio is an even higher 97.2%, which is over 800 basis points higher than the traditional office rate average and is on par with the industrial, apartment, and retail sectors. We've been able to grow our occupancy through strength in defense spending in mission support at our defense IT location, and have not been impacted by trends plaguing conventional office products.

Total portfolio was 95, 3% lease.

Defense a T portfolio has an even higher 97, 2%.

Which is over 800 basis points higher than the traditional office REIT average and is on par with the industrial apartment and retail sectors.

We've been able to grow our occupancy strength in defense spending in mission support it at our <unk> locations.

Has that been impacted by trends play games conventional actress sporadic.

Stephen E. Budorick: We placed nearly $1.4 billion of defense IT developments into service since 2019, totaling 4.5 million square feet that were 99% leased at the end of 2023 and on an annualized run rate basis. These developments... None of the properties we've joint-ventured generate over $80 million of contractual cash NOI, which is roughly a 30% increase to the 2019 cash NOI level, driving both FFO and NAV per share growth. We've also strengthened our balance sheet with our refinancing activities in 2020 and 2021 and then again with our exchangeable note offering in September.

We placed nearly one $4 billion.

Defense eight developments into service since 2019 totaling $4 5 million square feet that were 99% leased at the end of 2023.

On an annualized run rate basis. These two elements.

The properties, we've joint ventured generate over $80 million of contractual cash NOI.

Which is roughly a 30% increase to the 2019 cash NOI level, driving both <unk> and NAV per share growth.

We've also strengthened our balance sheet with our refinancing activities in 'twenty 2020 'twenty, one and then again with our exchangeable note offering in September.

Stephen E. Budorick: So to sum this up, our business was strong in 2019 and has only strengthened over the past four years. Our portfolio rental rates and occupancy are well above 2019 levels. We've expanded our relationships with top defense contractors in the country. We continue to demonstrate the ability to place highly leased development into service and strong initial cash yield. And we've defended and enhanced our balance, all of which serves to create further shareholder value. In 2023, simply put, we had another great year.

So to sum this up our business was strong in 2019.

Always strengthened over the past four years.

Our portfolio of rental rates and occupancy are well above 2019 level.

We've expanded our relationships with top defense contractors in the country.

We continue to demonstrate the ability to place highly leased development into service.

Strong initial cash yields.

And we've defended it enhanced our balance sheet.

All of which serves to create further shareholder value.

In 2023 simply put we had another great year, we delivered strong results with <unk> per share increasing two 5% over last year's results.

Stephen E. Budorick: We delivered strong results with FFO per share increasing two and a half percent over last year's results, exceeding our expectations by roughly 1.5 percentage points. Full Year St. Property Cash NOI increased 5.7%, which is the highest level since we started reporting the full year metric back in 2008. We completed 2.9 million square feet of total leasing volume, which consisted of 1.7 million square feet of renewal leasing with an 80% retention rate; 747,000 square feet of development leasing, exceeding our annual goal; and 452,000 square feet of vacancy leasing, again exceeding our annual goal. Rent spreads on renewals increased one and a half percent on the cash base and 9.3% on a gap basis.

Exceeding our expectations by roughly one five percentage points full.

Full year same property cash NOI increased five 7%, which desirous level since we started reporting the full year metric back in 2008 2008.

We completed $2 9 million square feet of total leasing volume reached.

Which consisted of one 7 million square feet of renewal leasing within 80% retention rate.

747000 square feet of development leasing.

Seeding our annual goal.

And 452000 square feet of vacancy leasing again exceeding our annual goal.

Rent spreads on renewals increased one 5% on a cash basis.

At nine 3% on a GAAP basis.

Stephen E. Budorick: Achieving the highest levels since 2008. We placed $275 million in development projects in the service that were 98% leased to year-end, totaling roughly 850,000 square feet in our Defense IT portfolio. We committed $280 million of capital to new development starts, which are 100% pre-release, totaling 690,000 square feet, all in our Defense IT portfolio. Our active development pipeline has a total cost of roughly $325 million, is 91% pre-lease, and totals roughly 820,000 square feet. We also raised our dividend in 2023 for the first time in over a decade. We are one of only two REITs in our sector to have raised a dividend during the year. And we maintain a rock-solid AFFO payout ratio, which has been at or below 70% for the past five years. Turning to the world, global threats to the national security of the United States continue to escalate with increased conflict in both the physical and cyber domains. The war in Ukraine and the aggressive posture of Russia pose a significant risk of escalation throughout Eastern Europe.

In the highest levels since 2008.

We placed $235 million of development projects into service that were 98% leased at year end.

Totaling roughly 850000 square feet all in our defense portfolio.

We committed $280 million of capital to new development starts which are 100% pre leased.

Totaling 690000 square feet.

And our defense portfolio.

Our active development pipeline is total cost of roughly $325 million is 91% pre leased.

Hurdles roughly 820000 square feet.

We also raised our dividend in 2023 for the first time in over a decade.

We are one of only two Reits in our sector to have raised the dividend during the year.

And we maintain a rock solid <unk> payout ratio, which has been at or below 70% for the past five years.

Turning to the World view, the global threat to National security of the United States continue to escalate with increased Catholics, and both the physical and cyber domains.

The warranty Ukraine, and the aggressive posture of Russia.

This is a significant risk of escalation throughout eastern Europe.

Stephen E. Budorick: Combat activities in Ukraine are revealing capabilities, strengths, and weaknesses in weapon systems and introducing new innovative applications that pose opportunities for and threats to our defenses. The terrorist attack in Israel demonstrated the need for increased intelligence in the Middle East. The Israeli combat response in Gaza triggered escalated terrorist and militia attacks on U.S. troops deployed in the region and has now advanced to U.S. combat response. Similarly, Houthi rebels' actions are threatening international trade routes through the Red Sea and the Suez Canal, triggering combat responses from both the United States and the United Kingdom.

Combat activities in Ukraine are reviewing capability strengths.

And weaknesses and weapon systems and.

<unk> introduced a new innovative applications that pose opportunities for and threats to our defense systems.

Terrorist attack in Israel demonstrated the need for increased intelligence and the middle East.

Israel combat response in Gaza triggered escalated terrorists a militia taxane year as troops deployed in the region and it has now advanced to U S combat responses.

Similarly, <unk> rebels actions.

In international trade routes through the Red Sea in the Suez Canal.

Triggering combat responses from royalty, United States and the United Kingdom.

Stephen E. Budorick: And meanwhile, China continues to possess an intent to invade Taiwan, and North Korea has stepped up its missile testing activity and its aggressive rhetoric. All of these situations demand elevated intelligence, surveillance, reconnaissance, and technological advancements. Moreover, the Center for Strategic and International Studies published a report which revealed that cyber attacks in the United States remained elevated in 2023, with 118 major cyber events, more than doubled the number of attacks that occurred just six years ago. Clearly, the threat environment to our national defense continues to escalate, suggesting U.S. defense spending has and must remain elevated to maintain parity and increase deterrence in the physical, cyber, and intelligence domains. Over the past three fiscal years, the U.S. defense budget increased by roughly $100 billion, or 15 percent.

And Meanwhile, China continues to Pasha and intend to invade Taiwan.

In North Korea is amplified missile testing activity and its aggressive rhetoric.

All of these situations demand elevated intelligence surveillance reconnaissance and technology advancements.

Moreover, the center for strategic and International studies.

Published a report was revealed the cyber attacks in the United States remained elevated in 2023 with 118 major cyber events more than double the number of attacks that occurred just six years ago.

Clearly the threat environment to our National Defense continues to escalate.

Suggests in U S defense spending has in months.

Elevated to maintain parity and elevate deterrence and the physical cyber and intelligence demands.

Over the past three fiscal years.

U S defense budget increase by roughly 100 billion.

Our 15%.

Stephen E. Budorick: Since we typically experience a 12 to 18 month lag between defense budget funding and contractor demand, we expect that this budget growth will continue to support strong tenant demand into 2025. Congress passed the fiscal year 2024 National Defense Authorization Act in December, which calls for a further 3.3% growth year over year in line with expectations and is now awaiting appropriation. Clearly, in this budgetary environment, funding for priority missions tied to national security must continue.

Since we typically experienced a 12 to 18 month lag.

Between defense budget funding and contractor demand. We expect this budget growth will continue to support strong tenant demand into 2025.

Congress passed the fiscal year 2020 for National Defense Authorization Act in December.

Which calls for a further three 3% growth year over year in line with expectations and is now awaiting appropriation.

Clearly in this rate environment 20 for priority mission state and National Security must continue.

Stephen E. Budorick: Turning the gate— We established 2024 FFO per share guidance of $2.51 at the midpoint, which implies 3.7% year-over-year growth. In contrast, two-thirds of the NAREIT client office REITs are expected to see FFO per share decline in 2024. The execution of our differentiated strategy has, and will, continue to produce differentiated results. Now, I'd like to turn it over to our new Chief Operating Officer, Britt Snyder, who joined the company in December. Britt is a highly experienced leader with nearly 20 years of real estate experience spanning asset management, development, and investment banking. We welcome Britt to the team, and we are glad to have him join us.

Yes.

Turning to guidance.

We established 2024 <unk> per share guidance of $2.51 estimated point.

Which implies three 7% year over year growth.

In contrast, two thirds of the NAREIT signed off the streets or expectancy <unk> per share decline in 2024.

The execution of our differentiation differentiated strategy has and will continue to produce differentiated results.

Now I'd like to turn it over to our new Chief operating Officer, Britt Snyder, who joined the company in December.

But it is a highly experienced leader with nearly 20 years of real estate experience spanning asset management development and investment banking.

We welcome Brett to the team and we are glad to have him join us.

Britt Snyder: Thank you so much, Steve. And first, I want to thank Steve, Anthony, and the entire board of trustees for their support in allowing me to take on this role of Chief Operating Officer. It's an honor to join the company given the 30 year history of supporting this country's national security mission. I'm very excited to work with such a talented and accomplished group.

Thank you so much Steve and first I wanted to thank Steve Anthony and the entire board of trustees for their support and allowing me to take on this role as the Chief operating officer.

It's an honor to join the company given the 30 year history of supporting this country's national security mission I am.

Very excited to work with such a talented and accomplished team.

Britt Snyder: Our portfolio is extremely healthy, and we continue to see robust demand in our defense IT markets, driven by sustained strength in defense spending, fueling high renewals and mission expansion. Our portfolio continues to outperform, with our total portfolio at 94.2% occupied. Our defense IT portfolio, which represents 91% of our total square footage, is 96.2% occupied, with particular strength in the National Business Park and Redstone Gateway.

Our portfolio is extremely healthy and we continue to see robust demand in our defense markets driven by sustained strength in defense spending fueling high renewals and mission expansions.

Our portfolio continues to outperform with our total portfolio at 94, 2% occupied.

Our defense portfolio, which represents 91% of our total square footage is 96, 2% occupied with particular strength in the National business Park in Redstone Gateway.

Britt Snyder: This strong demand is evidenced by the outperformance in vacancy leasing executed in 2023, along with our leasing activity ratio, which provides visibility into current demand for our unleased space. Our overall portfolio leasing activity ratio, which is defined as square feet of demand divided by available square feet of lease, remains very strong at 75%, with a total prospect pipeline of 880,000 square feet. The ratio is an even higher 89% in our defense IT portfolio, as we only have roughly 600,000 square feet of inventory available out of nearly 22 million square feet.

This strong demand as evidenced by the outperformance in vacancy leasing executed in 2023, along with our leasing activity ratio, which provides visibility into current demand on our only space.

Our overall portfolio leasing activity ratio, which is defined as square feet of demand divided by available square feet lease remains very strong at 75%.

With a total prospect pipeline of 880000 square feet.

The ratio isn't even higher 89% and our defense portfolio as we only have roughly 600000 square feet of inventory available out of nearly 22 million square feet.

Britt Snyder: Demand is especially strong in our Fort Meade-BW corridor segment, with a prospect ratio of over 110%. Yes, this means we actually have more prospects than we have space to lease. And you'll recall, we set our vacancy leasing target at 400,000 square feet for 2023 because we had so little space to lease.

<unk> is especially strong in our Fort Meade BW corridor segment with a prospect ratio of over 110%. Yes. This means we actually have more prospects than we have space to lease.

And Youll recall, we set our vacancy leasing target at 400000 square feet for 2023, because we had so little space to lease.

Britt Snyder: We actually exceeded that target by executing 452,000 square feet of vacancy leasing with a weighted average lease term of over eight years. In our defense IT portfolio, we increased the lease rate in all but one of our subsegments compared to year-end 2020. Now I'd like to share some key leasing stats. We signed 60 deals at an average lease size of 7,500 square feet.

Actually exceeded that target by executing 452000 square feet of vacancy leasing with a weighted average lease term of over eight years.

Our defense I'd portfolio, we increased the lease rate in all but one of our sub segments compared to year end 2022.

Now I'd like to share some key leasing stats.

We signed 60 deals at an average lease size of 7500 square feet.

Britt Snyder: Nearly 100,000 square feet, or 23% of the vacancy leasing was with the DoD. Over 200,000 square feet of vacancy leasing was with defense contractor tenants. Of these amounts, roughly 175,000 square feet, or almost 40% of the total, was tied to cyber activity.

Nearly 100000 square feet or 23% of the vacancy leasing was with the Dod.

Over 200000 square feet of vacancy leasing was with defense contractor tenants.

These amounts roughly 175000 square feet are almost 40% of the total was tied to cyber activity.

Britt Snyder: An important fact surrounding the strength of our tenant relationships is that 75% of combined vacancy and development leasing was repeat business with existing tenants. We executed over 90,000 square feet in our other segment in 2023, which exceeded our internal goal of 50,000 square feet. Of that 90,000 square feet, we signed 35,000 square feet across our three Baltimore properties and signed a 40,000 square foot lease with a law firm at 2100 L Street in D.C., which is now 83.5%. And the team is tracking some additional demand at 2100 L Street, and we hope to share some more good news soon on that front. We completed 2.9 million square feet of total leasing volume, which included 1.7 million square feet of renewals for the year. Our overall retention rate was 80%, with our defense IT portfolio even higher at 86%.

An important fact surrounding the strength of our tenant relationships is that 75% of combined vacancy and development leasing was repeat business with existing tenants.

We executed over 90000 square feet or others.

<unk> three <unk>.

We exceeded our internal goal of 50000 square feet.

Of that 90000 square feet, we signed 35000 square feet across our three Baltimore properties and signed a 40000 square foot lease with a law firm at $2100 Street in DC, which is now 83, 5% leased.

And the team is tracking some additional demand in 2100, <unk> Street, and we hope to share some market news soon on that asset.

We completed $2 9 million square feet of total leasing volume, which included $1 7 million square feet of renewals for the year.

Our overall retention rate was 80%, but our defense I'd portfolio, even higher at 86% and just to note for U S. Government renewals that were delayed into 2024 by the continuing resolution, which have they completed what have resulted in an 83, 4% overall retention rate with the defense portfolio at 88, 5%.

Britt Snyder: And just to note for U.S. government renewals that were delayed into 2024 by the continuing resolution, which had they completed, would have resulted in an 83.4% overall retention rate with the defense IT portfolio at 88.5%. We do expect those four renewals will be completed in the coming months.

<unk>.

We do expect thus far renewals will be completed in the coming months.

Britt Snyder: Cash rent spreads on renewal leasing were up 1.5%, while gap rent spreads were up 9.3%, driven by annual rent increases of 2.6%, with a weighted average lease term of 4.8 years. Measuring the starting cash rent of the tenant's expiring lease to the starting cash rent of the renewal lease, the compound annual growth rate achieved on these leases was 3.2% for the year. Now, on page 17 of our flipbook, we provide our large lease disclosure, which details our view of renewals defined as 50,000 square feet through 2025. Looking backward, over the last six quarters, we've renewed 17 large leases totaling 1.7 million square feet with a retention rate of 97 percent, including 15 full premises renewals and two renewals with only modest downsizes. And now, looking forward over the next eight quarters, we have 6.2 million square feet of leases expiring, which includes 3.3 million square feet of large leases. Large leases account for nearly 60% of total annualized rental revenue expiring in the next two years. Of those large leases, nearly 75% are full building leases to the U.S. government.

Excuse me cash rent spreads on renewal leases were up one 5%, while GAAP rent spreads were up nine 3% driven by annual rent increases of two 6% with a weighted average lease term of four eight years.

Measuring the starting cash rent for the tenants expiring lease to the starting cash rent of the renewal lease the compound annual growth rate achieved on these leases was three 2% for the year.

Now on page 17 of our flipbook, we provide our large lease disclosure, which details our view of renewals to find is 50000 square feet through 2025.

Looking backward over the last six quarters, we've renewed 17 large leases totaling one 7 million square feet with a retention rate of 97%, including 15 full premises renewals and two renewals with only modest downsizes.

Now looking forward over the next eight quarters, we have $6 2 million square feet of leases expiring, which includes $3 3 million square feet of large leases.

Large leases account for nearly 60% of total annualized rental revenue expiring in the next two years.

Of those large leases nearly 75% are full building leases to the U S government and recall in our 30 year history. We have had a 100% renewal rate on full building government leases, we expect a retention rate of over 95% on the 2024 and 2025 large leases and we remain highly confident our overall tenant return.

<unk> will remain strong in the near and medium term.

Now turning to development one key aspect of our development strategy is to always maintain some level of inventory at locations, where we see strong demand and when nearing fully leased we will commence a new project to create inventory.

Britt Snyder: And recall, in our 30-year history, we've had a 100% renewal rate on full building government leases. We expect a retention rate of over 95% on the 2024 and 2025 large leases, and we remain highly confident our overall tenant retention will remain strong in the near and medium term. Now turning to development, one key aspect of our development strategy is to always maintain some level of inventory at locations where we see strong demand, and when nearing fully leased, we'll commence a new project to create inventory. The National Business Park is 99.4% leased and 99.3% occupied across that 4.3 million square foot park. 30 of the 34 buildings are 100% leased, with only 25,000 square feet of unleased space per year.

The National Business Park is 99, 4% leased and 99, 3% occupied across that $4 3 million square foot Park 30 of the 34 buildings are 100% leased with only 25000 square feet of unused space at year end. Accordingly, we commenced development of MVP 400 in the first quarter of 2024.

Approximately 140000 square feet of capacity.

Similarly, Redstone Gateway is 98, 7% leased and 97, 5% occupied across that $2 3 million square foot Park <unk>.

19 of the 22 properties are 100% leased but less than 30000 square feet of only space at year end in the operating portfolio.

Accordingly, we are in the planning phase of RG 8500 to add approximately 150000 square feet of office capacity and we're planning RG 90, 750000 square foot High Bay building to meet increasing demand for that particular product type.

Our active developments totaled roughly $325 million and developed an investment or 91% pre leased and totaled 117000 square feet.

Britt Snyder: Accordingly, we will commence development of MBP 400 in the first quarter of 2024 to add approximately 140,000 square feet of capacity. Similarly, Redstone Gateway is 98.7% leased and 97.5% occupied across that 2.3 million square foot park. Nineteen of the 22 properties are 100% leased, with less than 30,000 square feet of un-leased space at year-end in the operating portfolio.

During 2023, we executed 747000 square feet of development leasing, which was towards the high end of guidance and includes three data center shell leases totaling 643000 square feet.

Over 100000 square feet at Redstone Gateway.

Our development leasing pipeline, which we define as opportunities, we consider 50% likely or better to win within two years or less currently stands at 500000 square feet due to due to the leasing success in the fourth quarter.

And beyond that we're tracking over 1 million square feet of potential future development opportunities, which should allow us to maintain a solid development pipeline in the near and medium term.

Britt Snyder: Accordingly, we are in the planning phase of RG8500 to add approximately 150,000 square feet of office capacity, and we're planning RG9700, a 50,000 square foot high bay building to meet increasing demand for that particular product type. Our active developments total roughly $325 million in investment, are 91% pre-leased, and total 117,000 square feet. During 2023, we executed 747,000 square feet of development leasing, which was towards the high end of guidance and includes three data center shell leases totaling 643,000 square feet and over 100,000 square feet at Redstone Gateway. Our development leasing pipeline, which we define as opportunities we consider 50% likely or better to win within two years or less, currently stands at 500,000 square feet due to the leasing success in the fourth quarter.

Before I conclude my remarks, I wanted to note that last month, Steve and I, along with senior leadership, and our asset management and operations groups.

I attended the ribbon cutting of our 300 secured gateway development located in our secure campus at Redstone Gateway, which is 100% lease to the Huntsville Center of the U S Army Corps of engineers we.

We commenced development of the $67 million project in the third quarter of 2021 and deliver the building to the Army Corps in the third quarter of 2023 to.

2000.

206000 square foot state of the art facility will serve as a prototype for future Army core locations and as an example of the value add solutions, we provided the U S government.

Colonel Sebastian Joey Commander of the U S Army Engineering and support center in Huntsville stated and I quote. This facility allows us to consolidate 16 different leases into one finally, all co located and meeting all force protection requirements and safety requirements for the very first time and.

We are very grateful and honored to be able to support the vital missions conducted out of the Redstone Arsenal and all of our strategic defense holdings that contributed to our collective national security with that I'll turn it over to Anthony.

You break we.

We reported 2023 <unk> per share as adjusted for comparability of $2 42.

Which was <unk> <unk> above the midpoint of our original guidance the.

The year benefited from early lease Commandments, commencements on several operating and development leases favorable renewal outcomes lower net operating expenses, primarily seasonal in utility costs and higher net development fees.

Britt Snyder: And beyond that, we're tracking over 1 million square feet of potential future development opportunities, which should allow us to maintain a solid development pipeline in the near and medium term. Before I conclude my remarks, I wanted to note that last month, Steve and I, along with senior leadership in our asset management and operations groups, attended the ribbon-cutting of our 300-secured gateway development located on the secure campus of Redstone Gateway, which is 100% leased to the Huntsville Center of the U.S. Army Corps of Engineers. We commenced development of the $67 million project in the third quarter of 2021 and delivered the building to the Army Corps in the third quarter of 2023. The 206,000-square-foot, state-of-the-art facility will serve as a prototype for future Army Corps locations and is an example of the value-add solutions we provide to the U.S. government.

We reported fourth quarter <unk> per share as adjusted for comparability of <unk> 62.

Which was once again above the midpoint of our guidance.

Quarter benefitted from higher development fees and slightly lower net operating expenses.

In 2023, we reported same property cash NOI growth of five 7%.

Increase is driven primarily by rent commencement with vacancy leasing executed in 2022.

Embedded escalations in virtually all of our leases lower than expected free rent concessions and rent commencement on development leases placed into service in 2021.

Same property occupancy ended the year at 93, 4%, which is flat sequentially from last quarter and up 140 basis points year over year, driven largely by the following segments to Fort Meade BW quarter increased 370 basis points year over year to 96, 2%.

60% of the increase was due to lease commencement commencements at the National business Park, primarily by the government.

Britt Snyder: Colonel Sebastian Jolie, Commander of the U.S. Army Engineering and Support Center in Huntsville, stated, and I quote, this facility allows us to consolidate 16 different leases into one, finally all co-located and meeting all force protection requirements and safety requirements for the very first time. End quote. We are very grateful and honored to be able to support the vital missions conducted out of the Redstone Arsenal and all of our strategic defense holdings that contribute to our collective national security. With that, I'll turn it over to Anthony. Thank you, Bray.

Redstone Gateway increased 940 basis points year over year to 97, 4%.

Lockheed Martin took occupancy of over 120000 square feet at 200 Redstone Gateway.

Our balance sheet is well positioned to navigate the current stress in the capital markets. We have no significant debt maturities until March 2026, our unencumbered portfolio represents 95% of total NOI from real estate operations.

At the end of the year, we had over 85% of the capacity on our line of credit available and over $165 million of cash on hand.

Anthony Mifsud: We reported 2023 FFO per share as adjusted for comparability of $2.42, which was four cents above the midpoint of our original guide. The year benefitted from early lease commencements on several operating and development... Favorable Renewal Outlook. Lower Net Operating, primarily seasonal and utility, and Higher Net Development. We reported fourth quarter FFO per share as adjusted for comparability of 62%, which was one cent above the midpoint of our guide, although the quarter benefited from higher development.

We currently have no variable rate debt exposure in February 2023, we entered into interest rate swaps that fix sofa at 375% for three years on our $125 million term loan and $75 million of our line of credit.

The swap rate is over 150 basis points lower than the current one month term sofa and provide significant protection in this prolonged elevated rate environment.

We expect 100% of our debt will be at fixed rates late into 2024, as we look to fund the equity component of our development investment from cash from operations after the dividend and fund.

Anthony Mifsud: Slightly lower Net Operating Income, 2023. We reported same property cash NOI growth of 5.7%. The increase is driven primarily by rent commencement with vacancy leasing executed in 2022. Embedded Escalations, and virtually all of our lead... lower-than-expected free-rent concession and Rent Commencement on Development Leases placed into service in 2020, same property occupancy, end of the year at 93.4%, which is flat sequentially from last quarter and up 140 basis points year-over-year, driven largely by the following segments. Fort Meade BW Corridor increased 370 basis points year-over-year to 96.2%. Sixty percent of the increase was due to lease commencements at the National Business Park, primarily by the government. Redstone Gateway increased 940 basis points year over year to 97.4%. Lockheed Martin took occupancy of over 120,000 square feet at 1,200 Redstone Gateway.

Funded debt component from our existing cash balance and subsequently from our line of credit.

With respect to guidance, we are establishing 2024 <unk> per share at a range of $2 47 to $2 55.

Implying three 7% growth over 2020 threes results.

At the midpoint of this guidance the midpoint of this guidance takes into account the following positive contributions.

25 from increases in GAAP, NOI, including nine from cash NOI from developments placed into service.

This is partially offset by <unk> 11 from higher interest expense based on higher projected debt balance and a slight decline in capitalized interest and <unk>, primarily from lower development fees higher G&A and other GAAP adjustments.

Same property cash NOI guidance is projected to increase 6% at the midpoint.

Of note more than half of the growth comes from the strength of our portfolio operations.

If we were to keep the 2023 pool intact, we forecast roughly three 5% same property cash NOI growth driven by average portfolio rent escalations of two 5%.

Anthony Mifsud: Our balance sheet is well positioned to navigate the current stress in capital. We have no significant debt maturities until March 2026. Our unencumbered portfolio represents 95% of total NOI from real estate operators. At the end of the year, we had over 85% of the capacity on our line of credit available and over $165 million. We currently have no variable rate debt.

And lease Commencements, primarily at our Fort Meade, BW corridor, and Redstone gateway segments.

The remaining two 5% of same property NOI growth is due to cash commencements on development leases placed into service in 2022, which are now part of the 2020 for same property pool.

Anthony Mifsud: In February 2023, we entered into interest rate swaps that fixed SOFR at 3.75% for three years on our $125 million term loan and $75 million of the line of credit. The swap rate is over 150 basis points lower than the current one-month term SOFR and provides significant protection in this prolonged, elevated rate environment. We expect 100% of our debt will be at fixed rates late into 2024.

We expect same property occupancy to end the year between 93% to 94%.

We do expect occupancy to dip in the first quarter driven by several nonrenewals, which with 30000 square feet occurring in the other segment and then remained relatively stable throughout the remainder of the year.

Similar to last year, we are targeting 400000 square feet of vacancy leasing, which we consider an aggressive goal since we are so highly leased.

We expect tenant retention in the 75% to 85% range.

Anthony Mifsud: As we look to fund the equity component of our development investment from cash from operations, fund and fund the debt component from our existing cash balance and subsequently from our line of credit. With respect to guidance, we are establishing 2024 FFO per share at a range of $2.47 to $2.55, implying 3.7% growth over 2020. At the midpoint of this guidance, it takes into account the following positive... $0.25 from increases in GAAP NOI, including $0.09 from cash NOI from developments placed into service, partially offset by $0.11 from higher interest expense based on higher projected debt balance, slight decline in capital, $0.05 primarily from lower development fees, higher G&A, and other gaps, same property cash NOI guidance is projected to increase 6% at the mid, Of note, more than half of the growth comes from the strength of our portfolio operations.

Cash rent spreads on renewals to be flat at the midpoint with average escalations of roughly two 5%.

We expect to commit $200 million to $240 million of investment capital for the full year and expect our development spend on active and future projects will range from $240 million to $280 million.

We plan to place three projects totaling nearly $150 million into service, which are 81% leased and totaled 400000 square feet.

We've historically frame development in terms of leased square feet.

However, beginning in 2024, we will instead guide to committed capital to investment as we feel this is a more suitable disclosure when evaluating the future NOI contributions from our invested capital.

The cost to construct a defense it property has increased approximately 25% when comparing the three year average of our starts between 2017 in 2019, today's commence between 2021 and 2023 driven by inflation in both material and labor costs.

Importantly, we earned both our return and NOI on invested capital not square feet.

Anthony Mifsud: If we were to keep the 2023 pool intact, we forecast roughly three and a half percent same property cash and OI, driven by average portfolio rent escalations of two and a half percent and lease commencements, primarily at our Fort Meade BW Corridor and Redstone Gateway. The remaining two and a half percent of same property NOI growth is due to cash commencements on development leases placed into service in 2022, which are now part of the 2024 same property. We expect same-property occupancy to end the year between 93 and 94. We do expect occupancy to dip in the first quarter, driven by several non-racial, which with 30,000 square feet occurring in the other sector, and then remain relatively stable throughout the remainder of the year, similar to last year.

The increases in costs, we have been able to increase our initial cash yield on developments on defense it projects modestly to approximately 8.25%.

Since we have leased all of the land we owned for data Center shell developments, we assumed no additional capital is committed to shelves in 2024.

As illustrated on slide 10 of our flipbook that $200 million to $240 million of expected.

Investment in 2024 and defense. It office projects is the second highest annual level since 2019.

In closing the building blocks of our guidance illustrate why we are well positioned to continue to generate increasing NOI.

And cash from operations.

Back to allocate towards accretive investment opportunities.

With that I'll turn the call back to Steve.

Thank you.

I'll close by summarizing our key messages.

We delivered another strong year in 2023 with <unk> per share <unk> <unk> above our original guidance. Our defense segment is <unk> seven 2% leased the highest rate achieved since we started reporting this segment in 2015.

Anthony Mifsud: We are targeting 400,000 square feet of vacant space, which we consider an aggressive goal since we are so highly- We expect tenant retention in the 75% to 85% range and cash rent spreads on renewals to be flat as of, with average escalations of roughly two and a half. We expect to commit $200 to $240 million of investment capital for the full year and expect our development spend on active and future projects will range from $240 to $280 million. We plan to place three projects totaling nearly $150 million into service, which are 81%.. total 400,000 square feet. We've historically framed development in terms of least square feet.

Full year same property cash NOI increased five 7%, which is the highest level since we started reporting the full year metric in 2008.

We exceeded our vacancy leasing target by executing 452000 square feet.

Our $325 million of active developments.

Which are 91% pre leased provided a solid trajectory for NOI growth over the next few years.

Our liquidity is very strong and we continue to expect to self fund the equity component of our expected development investment going forward.

Anthony Mifsud: However, beginning in 2024, we will instead guide to committed capital, as we feel this is a more suitable disclosure when evaluating the future NOI, from our investors. The cost to construct a defense IT property has increased approximately 25% when comparing the three-year average of our starts between 2017 and 2018, to those commenced between 2021 and 2023, driven by inflation in both material and labor. And most importantly, we earn both our return and NOI on invested capital, not square feet. Despite the increases in costs, we have been able to increase our initial cash yield on developments on defense IT projects modestly to approximately $8.25%. Since we have leased all of the land we own for data center shell developments, we assume no additional capital is committed to shells, as illustrated on slide 10 of our flipbook. The $200 to $240 million of expected investment in 2024 and the Defense IT Office is the second highest annual level since 2000. In closing, the building blocks of our guidance illustrate why we are well positioned to continue to generate increasing NOI, FFO, and cash from operations, which we expect to allocate towards a creative investment opportunity. With that, I'll turn the call back.

We established 2024 <unk> per share guidance of $2.51 at the midpoint, which implies three 7% year over year growth.

Between 2019, and 2023, we generated compound annual <unk> per share growth of four 5%.

Looking forward.

We continue to expect compound annual <unk> per share growth.

Roughly 4% between 2023 and 2026 from the midpoint of our original 2023 guidance.

In a time, where global threats are increasing.

Data security interest and facility security are becoming more important every day.

Fueling demand for specialized real estate solutions, we are uniquely positioned to capture that demand and we expect their strong performance to continue.

Later, please open the call for questions.

Thank you Mr. <unk> at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment, while we compile the Q&A roster.

Yes.

Our first question comes from the line of Camille Bonnell with Bank of America. Your line is open.

Hi, everyone. Steve can you remind us how the three three national defense budget that passed in December compares to the initial projections.

And then is there anything on the horizon either from elections are potential major agency relocations that youre closely watching this year.

Stephen E. Budorick: Thank you. I'll close by summarizing our key messages. We delivered another strong year in 2023 with FFO per share four cents above our original guidance. Our Defense IT segment is 97.2% leased, the highest rate achieved since we started reporting the segment in 2015. Full Year St. Property Cash NOI increased 5.7%, which is the highest level since we started reporting the full year metric in 2008. We exceeded our vacancy leasing target by executing 452,000 square feet.

Sure so with regard to the budget increase.

It's exactly where it was expected to be in the three to three 5% range do you recall the last three years that budget ramped up a 100 billion.

So three three is a big number on an extra 100 billion.

And a lot of money to fund defense priorities.

With regard to the election, it will be a fascinating outcome.

I just want to remind everybody that since 2016 after the restorative increase to that.

Defense budget, we have had.

Going on seven years of solid bipartisan support for increases in defense spending.

Stephen E. Budorick: Our $325 million of active developments, which are 91% pre-leased, provide a solid trajectory for NOI growth over the next few years. Our liquidity is very strong, and we continue to expect to self-fund the equity component of our expected development investment going forward. We established 2024 FFO per share guidance of $2.51 at the midpoint, which implies 3.7% year over year growth. Between 2019 and 2023, we generated compound annual FFO per share growth of four and a half percent. Working forward.

And it's the one part of our government that operates.

Strongly cooperatives bipartisan way and I expect irrespective of this.

I'll cover this selection this support will continue.

Okay.

And in terms of like major agency relocations are there any that you have from here.

Tracking in your markets.

The only one that comes up from time to time is.

The prolonged discussions about the relocation of the FBI their headquarters building in downtown DC.

Two a more protected location that would either be in Virginia and Maryland.

It's kind of gone quiet in the <unk>.

World of current events over the last six months.

I think its so heavily disputed as there'll be years.

Sure it's finalized.

That's helpful and all the disclosure you've provided has been very helpful.

Operator: We continue to expect compound annual FFO per share growth of roughly 4% between 2023 and 2026 from the midpoint of our original 2023 guidance, in a time when global threats are increasing. Data security and facility security are becoming more important every day, fueling demand for specialized real estate solutions. We are uniquely positioned to capture that demand, and we expect their strong performance to continue. Operator, please open the call for questions. Thank you, Mr. Budorick. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.

Understanding the building blocks that support your three year CAGR of 4% just given the high expected retention levels could you comment on how that outlook is on an asset basis.

Well, Anthony I'll flip it to from an <unk> standpoint.

As I think we've talked about on some recent calls we had some elevated.

Leasing capital in 2023, 22 and 2023.

And the third and fourth quarter are back to sort of R. R.

Back to our regular levels.

We expect <unk> over that three year period to grow slightly more of that than what we've been talking about with respect to <unk>.

Because of the capital.

The relative capital that we have to invest in renewal and new leasing.

Camille Bonnel: To withdraw your question, please press star 11 again. One moment while we compile the Q&A roster. Our first question comes from the line of Camille Bonnel with Bank of America. Your line is open. Hi, everyone.

Compared to some of our.

Our peers.

Okay, Great and welcome Brett just lastly could you provide some color on that.

Move outs that were highlighted in the press release last night, what are some reasons your tenants are not renewing and how much our tenants downsizing. Thank you.

Stephen E. Budorick: Steve, can you remind us how the 3.3 billion national defense budget that passed in December compares to the initial projections? And then is there anything on the horizon either from elections or potential major agency relocations that you're closely watching this year? Sure.

Yes, absolutely.

I mean, its something were seeing I guess outside of the defense World.

And primarily in our non defense side.

Tenants and with law firms for example, one of them was a law firm that is consolidating and theres some strategic consolidations of.

Stephen E. Budorick: So with regard to the budget increase, it's exactly where it was expected to be in the three and a half percent range. Do recall the last three years that the budget ramped up by $100 billion. So 3.3 is a big number on an extra $100 billion and a lot of money to fund defense priorities. With regard to the election, it'll be a fascinating outcome.

A few smaller.

It does.

Hence related contractors, but that is definitely the exception most of them are growing.

Three we routinely get some known renewal for the small and mid size.

Contract is due to the M&A activity.

So they tend to innovate create a new concept of product. They can so they grow to a certain level and they typically sell towards the larger contractors, sometimes that results in some contraction as they get consolidated into bigger tenants and one other this is Brad one other thing.

Stephen E. Budorick: I just want to remind everybody that since 2016, after the restorative increase in the defense budget. We have had going on seven years of solid bipartisan support for increases in defense spending, and it's the one part of our government that operates in a strongly cooperative bipartisan way, and I expect, irrespective of the outcome of this election, that support will continue. And in terms of major agency relocations, are there any that you've been hearing about tracking in your market? The only one that comes up from time to time is Prolonged discussions about the relocation of the FBI out of their headquarters building in downtown D.C. to a more protected location that would either be in Virginia or Maryland.

Is that.

When we do have non defense in it.

Tenants, leaving our defense I'd.

Folio, there typically back filled with defense Iot with incredibly strong credit and strong businesses. So we actually see that as a positive.

Yes.

Thank you.

One moment for our next question.

Yes.

Okay.

Our next question comes from Blaine Heck with Wells Fargo. Your line is open.

Great. Thanks, Good afternoon, Steve how do you feel about pricing power in general you guys achieved one 5% rent spreads in 2023, but you are guiding to flat for 2024 I'm. Just wondering how much of that is conservatism and returned to more historical averages versus maybe something in the market telling you it could be tough.

A little tougher.

Push rents this year or even specific leases or extension options that might keep that metric will lower this year.

Stephen E. Budorick: It's kind of gone quiet in the world of current events over the last six months. And I think it's so heavily disputed, it'll be years before it's finalized. That's helpful. And all the disclosure you've provided has been very helpful in understanding the building blocks that support your three-year CAGR of 4%. Just given the high expected retention levels, could you comment on how that outlook is on an ASFO basis? Well, Anthony, I'll flip it to you.

So one thing that affects that overall metric is the mix of leases and where they are at we do.

Good.

Significant amount of leasing over the last year in the BW corridor, where pricing power is.

As strong as anywhere we expect some.

Good traction in northern Virginia, which is a little more competitive.

And then generally you will notice we guided pretty conservatively because we never went over premise so it's a little bit mix and.

Anthony Mifsud: From an AFO standpoint, um You know, as I think we've talked about on some recent calls, we had some elevated Leasing Capital in 2023, 2022, and 2023, and the third and fourth quarter are back to sort of our, We'll be back to our regular levels. So we expect AFFO over that three-year period to grow slightly more than we've been talking about because of the Capitol. The relative capital that we have to invest in renewal and new leasing compared to some of our partners. Okay, great. And welcome, Britt.

Probably 50, 60% just conservative viewpoint inner guidance.

Got it really helpful can.

Can you talk about the 500000 square feet of development leasing pipeline you have at this point and how much of that is.

And stages are close to becoming executed deals just trying to get a feel for kind of the cadence of commencement in 'twenty four and then also how much is NPT versus Huntsville.

Britt Snyder: Just lastly, could you provide some color on the known move outs that were highlighted in the press release last night? What are some reasons your tenants are not renewing their leases? And how much are tenants downsizing? Thank you. Absolutely.

Yes.

So I think it's two to one huntsville than BP.

Okay.

Commencement.

I think youll see.

June through November.

Peak volume.

Britt Snyder: I mean, it's something we're seeing, I guess, outside of the defense IT world and primarily in our non-defense IT tenants. And with law firms, for example, one of them was a law firm that is consolidating. And there are some strategic consolidations of a few smaller IIT defense-related contractors, but that is definitely the exception. Most of them are growing.

Execution.

Yes.

As Brent mentioned, we have another million plus square feet of <unk>.

Projects that were entertaining with customers.

But as I pointed out on prior calls in this world of an elevated cost of capital it really effects.

So as Youre, making of all companies, even defense contractors and what we see as they are being very methodical to make the business cases for the facilities they need.

Britt Snyder: You know, we routinely get some non-renewal from small and mid-sized contractors due to M&A activity. So they tend to innovate, create a new concept or product they can sell, they grow to a certain level, and then they typically sell to one of the larger contractors. Sometimes that results in some contraction as they get consolidated into bigger tenants. And one other, this is Brad, one other thing I'll note is that when we do have non-defense and IT tenants leaving our defense IT portfolio, they're typically backfilled with defense IT with incredibly strong credit and strong businesses. So we actually see that as a positive.

So the pace of progress is slow.

Visibility is very clear.

We are.

Very excited about what we can get done this year, Hey, Blayne, just to just to clarify and make sure.

Make sure you understand the distinction.

The 500000 square feet that Brett mentioned.

Mentioned is new leasing activity that we that we're looking at that has the possibility of being executed in 2024 in terms of Commencements. The vast majority of that leasing is already executed.

Britt Snyder: Thank you. One moment for our next question. Our next question comes from Blaine Heck with Wells Fargo. Your line is open. Great, thanks. Good afternoon.

And the Commencements that we expect in 2024 are the development projects that are.

Blaine Heck: Steve, how do you feel about pricing power in general? You guys achieved 1.5% rent spreads in 2023, but you're guiding to a flat for 2024. I'm just wondering how much of that is conservatism and a return to more historical averages versus maybe something in the market telling you it could be a little tougher to push rents this year, or even specific leases or extension options that might keep that metric lower this. So one thing that affects that overall metric is the mix of leases and where they're at. We did a significant amount of leasing over the last year in the B We expect some good traction in Northern Virginia, which is a little more competitive.

Under construction right now and significantly well leased.

Right. Okay. I think we're on the same page there okay helpful color.

And then Steve I appreciate your comments on having defense support no matter what happens in the election, but have you seen any pause in leasing activity in past election year. It just that your tenants kind of takes some time to figure out the ultimate implications of either kind of more of the same or a new president in office.

Yes, we really see that.

In either of the prior two elections.

Demand was pretty solid throughout.

Sure.

So no.

The business case for leasing and development is driven by defense needs and funding that's usually already occurred beforehand.

And with the mission critical nature of the tenants we support.

It's really that tight.

Changes in philosophy on the edges with the.

Stephen E. Budorick: And then generally, you'll notice we guide pretty conservatively because we never want to over-promise. So I'd say a little bit mixed and probably 50, 60% just a conservative viewpoint in our guidance. Got it. Really helpful.

<unk>.

President.

Physician.

Great. Thank you.

One moment our next question.

Okay.

Our next question comes from Michael Griffin with Citi. Your line is open.

Stephen E. Budorick: Can you talk about the 500,000 square feet of development leasing pipeline you have at this point? And how much of that is in the advanced stages or close to becoming executed deals? Just trying to get a feel for kind of the cadence of commencements in 24.

Great. Thanks, maybe going back to the defense spending that for a second Steve you noted the passage of the NDAA in December right.

The department is still running on a continuing resolution.

Just be curious your thoughts on if these continuing resolutions continue to be the case, and whether or not that would impact demand or or space needs. Some of your clients.

Stephen E. Budorick: And then also, how much is NBP versus Huntsman? Thank you. Thank you. So I think it's two to one, Huntsville to NBP, roughly, commencements. I think you'll see, June through November, with peak volume of execution. We have, as Britt mentioned, another million plus square feet of projects that were entertaining customers. But as I pointed out on prior calls, in this world of an elevated cost of capital, it really affects the decision making of all companies, even defense contractors. And, you know, what we see is they're being very methodical in making the business cases for the facilities they need. So the pace of progress is a little slow, but the visibility is very clear. We're very excited about what we can get done this year.

Yes, well.

Let me, let me phrase it this way.

In the 12 years that I've worked at this company.

In only one year did we not have a continuing resolution.

Continuing resolution is really the norm and the issue is does it get wrapped up early or it has become protracted.

The longest.

Retracted continuing resolution was in 2017.

Which extended to about may 25th.

Primarily because the new president and wanted to top up the defense spending and slow down the passage.

I would think by March we should be.

Congress would get around to the point, where they're going to appropriate the funds, but it could go longer ultimately it doesn't affect the outcome that are going to come our way it will.

Cram a lot of activity in the second half of the year.

Stephen E. Budorick: Hey Blaine, just to clarify and make sure... The 500,000 square feet that Britt mentioned is new leasing activity that we were looking at that has the possibility of being executed in 2024. In terms of commencement, the vast majority of that leasing is already executed, and the commencements that we expect in 2024 are the development projects that are under construction right now and significantly well-lit. Right, okay. I think we're on the same page there. Okay. Helpful color.

So it could manifest itself in some.

Lower progress in the first and second quarter, which will catch up for.

Yeah.

Got you.

Paul.

And then maybe just on the development pipeline and future opportunities to talk about our current pipeline being highly prelease seems like demand is really outstripping supply in some of your key markets is there any appetite to start to execute on future development opportunities are construction costs still prohibitive.

To make that happen.

Well.

Blaine Heck: And then, Steve, I appreciate your comments on having defense support no matter what happens in the election. But have you seen any pause in leasing activity in past election years, just as your tenants kind of take some time to figure out the ultimate implications of either kind of more of the same or a new president in office? You know, we really didn't see that in either of the prior two elections. Our demand was pretty solid throughout. So no, I'm not.

Bret pointed out.

We just kicked off.

Call it a not pre leased or spec building at the MVP.

And that will deliver about 138000 square feet early next year, because we need the inventory.

We're about 40% leased.

Inventory building in Redstone Gateway RG 100 gig.

We have very clear visibility into the full lease up of that asset. So we're actually moving dirt in preparing to kick off our <unk> 500.

Stephen E. Budorick: The business case for leasing and development is driven by defense needs and funding that's usually already occurred beforehand. And with the critical nature of the tenants we support, it's really not tied to changes of philosophy on the edges with the President's Association.

It should be 150000 square foot building the creative inventory.

And then we've had increased demand for our hybrid product.

At Redstone Gateway, so we're going to kick off the 50000 square foot.

Michael Griffin: Great, thank you. One moment for our next question. Our next question comes from Michael Griffin with Citi. Your line is open.

High Bay support facility for some of our existing tenants.

Also this quarter.

So when we have demand and a lack of inventory we will build to that.

Stephen E. Budorick: Great, thanks. Maybe going back to the defense spending bit for a second, Steve, you noted the passage of the NDAA in December, but I think the Defense Department is still running on a continuing resolution. I'd just be curious your thoughts on if these continuing resolutions continue to be the case and whether or not that would impact the kind of demand or space needs for some of your teams. Yeah, well, let me phrase it this way. In the 12 years that I've worked at this company, only one year did we not have a continuing resolution. The continuing resolution is really the norm. And the issue is, does it get wrapped up early, or does it become protracted? Protracted continuing resolution was in 2017, which extended to about May 25, primarily because the new president wanted to top up the defense spending and slow down the passage. I would think by March, we should be. Congress will get around to the point where they're going to appropriate the funds, but it could go longer.

Demand.

Great. That's it for me thanks for the time.

Thanks, Michael.

One woman from her next question.

Our next question comes from Tom Catherwood with BP AIG. Your line is open.

Thank you and good afternoon, everybody, Steve I know, there's no acquisitions in guidance, but you've talked in the past about maintaining liquidity for potential investment opportunities are you seeing any early movement in the transaction markets and kind of given your focus on specific submarkets.

And tenants what criteria would you be keying on if you were to pursue a deal.

So that's great question to pursue a deal has to be an asset with current or expected occupancy that serves submissions that we typically serve geographically would have to be.

Very closely located.

The assets we own currently.

And then the return that we would have to get on that asset.

Stephen E. Budorick: Ultimately, it doesn't affect the outcomes that are going to come our way. It will cram a lot of activity into the second half of the year, so it could manifest itself in some lower progress in the first and second quarters, which we'll catch up on. Gotcha. That's helpful.

We would have to be competitive with our development yields.

And so that creates pretty small set of opportunities.

We're always diligent to look at opportunities that come up.

We haven't found any that meet that criteria.

Got you I appreciate that and then maybe sticking with your commentary about the inventory building at and be key.

Stephen E. Budorick: And then maybe just on the development pipeline and future opportunities. You talked about the current pipeline being highly pre-leased. Seems like demand is really outstripping supply in some of your key markets. Is there any appetite to start to execute on future development opportunities, or are construction costs still prohibitive to make that happen? Well, Britt pointed out that we just kicked off call it a not a pre-leased or spec building at the MVP.

Given that the park is was 99, 4% leased.

That inventory building doesn't deliver with 18 24 months whatever might be.

What are tenants doing when they need expansion space and as the demand having any impact on your other Howard County business parks.

Stephen E. Budorick: And that'll deliver about 138,000 square feet early next year because we need the inventory. We're about 40% leased on an inventory building in Redstone Gateway, RG8100. We have very clear visibility into the full lease up of that asset.

We've been able to push quite a bit of demand that would've otherwise gone too.

The MVP into our portfolio in Columbia Gateway.

We forget.

The prospect ratio, that's about 160% for vacancy in that park.

Stephen E. Budorick: So we're actually moving dirt and preparing to kick off RG8500, which will be a 150,000 square foot building to create inventory. And then we've had increased demand for a high bay product at Redstone Gateway, so we're going to kick off a 50,000 square foot high bay support facility for some of our existing tenants. Also, TISC Corps.

So it is very positive for us long term because we're adding.

Quite a bit of skip facility zinc Columbia gateway that typically would have favored the MVP.

Got it got it and then last one for me first off congratulations on your first call.

And second second off you had mentioned a handful of lease renewals that were delayed because of the continuing resolution how does the mechanics of that work did the leases expire and the tenants are now a month to month or is there still term left on the lease how does that kind of all come together.

Stephen E. Budorick: So when we have demand and a lack of inventory, we will build to meet the demand. Great. That's it for me. Thanks for the time.

Michael Griffin: Thanks, Michael. One moment for the next question. Your next question comes from Tom Catherwood with BTIG. Your line is open. Thank you, and good afternoon, everybody.

Yes no.

It just gets put into if it's approaches.

Tom Catherwood: Steve, I know there's no acquisitions in guidance, but you've talked in the past about maintaining liquidity for potential investment opportunities. Are you seeing any early movement in the transaction markets and kind of giving your focus to specific submarkets and tenants? What criteria would you be keying on if you were to pursue a deal?

Exploration then it just goes into holdover.

But I mean, we feel great, but like I said about those about those leases.

It's going to happen in 2024, it just some things are out of our control.

But yes.

I would say in that space. There is no. Obviously, we have no intention of moving them out are asking to move their long term partners of ours.

Stephen E. Budorick: So, that's a great question. To pursue a deal, it has to be an asset with current or expected occupancy that serves the missions that we typically serve. Geographically, it would have to be very closely located to the assets we own currently, and then the return that we'd have to get on that asset would have to be competitive with our development yield. And so that creates a pretty small set of opportunities. But we're always diligent to look at opportunities that come up. We haven't found many that meet that criteria.

To be clear.

We use a different term Stan so not holdover.

Hope hold over it implies that we could put penalties.

Kind of Jackup rent is just.

Provisions in the lease to allow them to keep paying what they were paying we true up when they get a lease.

Okay Thats perfect that was what I was worried about was that there would be some sort of a roll down if they were on a holdover lease. So it would be just so no change in the rent while the full.

Stephen E. Budorick: Gotcha. I appreciate that. And then maybe sticking with your commentary about the inventory building at NBP, given that the park was 99.4% leased, and that inventory building doesn't deliver, you know, with 18, 24 months, whatever it may be, what are tenants doing when they need expansion space, and is the demand having any impact on your other Howard County business parks? We've been able to push quite a bit of demand that would otherwise have gone to... the MVP into our portfolio in And we've got a prospect ratio that's about 160% for our vacancy in that park. So, it's very positive for us long-term because we're adding quite a bit of skiff facilities in Columbia Gateway that typically would have favored the MVP. Got it. Got it. And then last one for me, Britt. First off, congratulations on your first call.

While you're coming through the continuing resolution.

Stamps correct.

Got it that's it for me thanks, everybody.

One moment for our next question.

Our next question comes from Richard Anderson with Wedbush Securities. Your line is open.

Thanks, Good afternoon, so on slide 17, what about the other $2 9 million square feet that is 50000 square feet or greater what's the status of those situations.

Well, if you look at our overall guidance.

Password for me to go lease by lease.

Very comparable maybe.

There'll be some non renewal, but we're guiding to a midpoint of <unk> and <unk>.

We're very confident we're going to deliver that.

Okay.

You mentioned, the statistic, 89% demand to space available in your defense segment.

I guess, that's a good number I think you'd like it to be above.

Britt Snyder: And secondly, you mentioned a handful of lease renewals that were delayed because of the continuing resolution. How does the mechanics of that work? Did the leases expire, and are the tenants now month to month, or is there still term left on the lease? How does that kind of all come together? Um, yeah, no, it just gets put into, if his approach is hold, um, expiration, then it just goes into holdover. And, um, but I mean, we feel great, like I said about those leases, um, it's going to happen in 2024. It's just some things are out of our control. Um, but yeah, they would stay in space.

Above 100%.

Is.

Or is there a line of sight and how that number might change over the passage of time.

Based on what Youre seeing today is am I am I asking for too much for it to be over 100%.

Yes over 100 pretty rare, we actually overdraft, we track that statistic.

And anything over 70 is pretty strong.

60 is not unusual in a submarket.

But remember that spot demand for your inventory.

So it changes with every ebb.

The inflows deal.

70, and up is very strong.

Over 100 is great and we are over 100 in the BW corridor, which includes Columbia Gateway Alright.

Britt Snyder: There's no, obviously we have no intention of moving them out or asking them to move their, uh, long-term partners. And to be clear, we use a different term: it's standstill, not holdover. Holdover implies that we could put penalties on them and kind of jack up the rent. There are just provisions in the lease that allow them to keep paying what they were paying. We will true up them when they get a lease, and that's perfect.

Alright.

6% same store NOI growth for this coming year at the midpoint.

A little bit less than 4% <unk> growth, Anthony said, maybe a little bit more <unk> growth, but still the common theory is.

If you get X.

Internal growth you should get X plus y.

Bottom line is not the case here with you and actually your <unk> growth is actually lower is that just a condition of the fact that your big time developer and we will never kind of really see.

Britt Snyder: See, that was what I was worried about was that there would be some sort of a roll-down if they were on a holdover lease. So it would be just so there's no change in the rent while you're coming through the continuing resolution. Yeah, Stan's stuff.

Six equal, 8% <unk> growth or four equal, 6% <unk> growth I'm, just curious if thats just sort of a function of the way.

Tom Catherwood: Got it. All right. That's it for me.

Tom Catherwood: Thanks, everybody. One moment for our next question. Our next question comes from Richard Anderson with Wedbush Securities. Your line is open. Thanks, good afternoon.

Hey, CDP operates.

No I think it's a function of.

No one's none of us are immune from the change in interest rates.

And the full year impact of the exchangeable note offering that we did in September of last year.

Richard Anderson: So on slide 17, what about the other 2.9 million square feet that is, 80,000 square feet or greater? What's the status?

As in 2020 for his math.

Stephen E. Budorick: Well, if you look at our old... It's possible for me to go lease by lease. It's very comparable.

And that 5.25% is higher than our <unk>.

Stephen E. Budorick: Maybe there'll be some non-renewal, but we're getting to a midpoint of 80, and we're very confident we're going to deliver that. OK, um, You mentioned the statistic 89% demand for space available in your defense IT segment. You know, I guess that's a good number. I think you'd like it to be above 100%. Um, you know, is there?

That portfolio interest rate that we had prior to that transaction. So.

Some of that.

Both internal and external external growth.

EBITDA growth is being absorbed by an increase in interest expense.

I guess I would have thought that interest.

Interest rates.

Last year versus this year, almost almost a wash if not an opportunity, but I hear your point you have more stuff to deal with so interest from Mistras expense goes up but in theory, you should see what I described.

Stephen E. Budorick: Is there a line of sight into how that number might change over the passage of time based on what you're seeing today? And am I asking for too much for it to be over 100%? Yeah, over 100 is pretty rare. We actually have a graph; we track that statistic. And anything over 70 is pretty strong.

Holding all else constant that shouldn't.

It shouldn't be a reason why you shouldnt get more <unk> growth than you get same store growth is that fair statement.

Stephen E. Budorick: 60 is not unusual in a sub-market. But remember, that's spot demand for your inventory, so it changes with every ebb and flow of a deal. But 70 and up is very strong.

Yes.

All capital costs being equal that's a fair statement. Okay last question when interest rates come down there is some pretty interesting growth that could come back well.

Richard Anderson: Over 100 is great, and we are over 100 in the BW corridor, which includes Columbia Gateway, percent same-store and OI growth for this coming year at midpoint. A little bit less than 4% FFO growth, Anthony said, maybe a little bit more AFFO growth. Still, you know, the common theory is, you know, if you get X.

Good.

And then the last question is I'm, just thinking that you mentioned.

And how important it is to your business I wonder about AI.

And whether that is.

Yes, being weaponized certainly it is.

Stephen E. Budorick: Internal growth, you should get X plus Y at the bottom line here with you. However, your FFO growth is actually lower. Is that just a condition of the fact that you're a big-time developer and you never kind of really see... You know, six... I'm just curious if that's just sort of a function of the way CDP operates. No, I think it's the function of no one; none of us are immune from the changes in interest rates.

Is that like a.

A demand driver for cyber demand as well and how do you see AI impacting your business either positively or negatively whether it's a demand or a competitive threat to <unk>.

I'm, just referring a little bit, but I'm curious what your if you have any thoughts on that.

Well the answer is yes, it would be highly speculative so if we understand the speculative.

Stephen E. Budorick: And the full year impact of the exchangeable note offering that we did in September of last year is in 2024's math. And that five and a quarter percent is higher than our, you know, that portfolio interest rate that we had prior to that transaction. So some of that, both internal and external growth EBITDA growth is being absorbed by an increase in interest. I guess I would have thought that.

Eventually the AI technology is going to.

Reach some level of competency, where it will have to be.

Evaluated for use in the Dod environment.

And I don't think we've seen we have no evidence that we've seen any increased activity and contracts related to AI.

As of.

Current.

Richard Anderson: Interest rates last year versus this year, almost a wash, if not an opportunity, but I hear your point. You have more stuff to deal with. So... The expense goes up. But in theory, you should see what I described, holding all else constant. There shouldn't be any reason why you shouldn't get more SFO. Store Growth. Yeah, if all capital costs are equal, that's a fair statement. Okay, last question. And when interest rates come down, there's some pretty interesting growth that could come back. Well, you had better do it.

So could be potentially upside.

But it's a little early to tell okay fair enough. Thanks very much.

One moment for our next question.

Our next question comes from Dillon presents <unk> with Green Street. Your line is open.

Good afternoon, guys. Thanks for taking the question I guess, just going back to some of the comments on cash re leasing spread guidance being potentially conservative in 'twenty four but I guess, just as we think about the business over the next five years.

Given the portfolio occupancy is at historically high levels and given your comments on being able to push higher yield on cost in a new defense in development I guess.

Richard Anderson: Stay tuned. And then the last question is, I'm just thinking that you mentioned cyber and how important it is to your business. I wonder about AI these days, and whether that. You know, being weaponized, certainly it is.

Does that give you guys the ability to continue to push rents.

Stephen E. Budorick: Is that like a... Demand Driver for Cyber Demand as well? And how do you see AI impacting your business either positively or negatively, whether it's a demand or a competitive threat? Riffing a little bit, but I'm curious what you think, if you have any.

And the operating portfolio is the zero to two areas I'd call it a flat mark to market.

Stephen E. Budorick: Well, the answer has got to be highly speculative. So if we understand the speculative part. Eventually, AI technology is going to reach some level of competence where it will have to be evaluated for use in the DoD environment. And I don't think we've seen, we have no evidence that we've seen any increased activity in contracts related to AI as of yet. So there could be potentially an upside. But it's a little early to tell. Okay, fair enough. Thanks very much.

Sort of a low baseline as we look at thinking about the business over the next five years.

Well do recall what are the.

We've seen dynamics of our business is we have embedded growth in our leases and that's why we give you the compound annual growth rate from the original lease to the renewal lease because recapture growth.

In all of our leases and the Mark to market is really.

And the renewal.

Are we a little below the market growth in rent or are we a little above.

Dylan Brzezinski: One moment for our next question. Our next question comes from Dylan Brzezinski with Green Street. Your line is open. Good afternoon, guys.

And the zero guidance as the internal growth.

We expect.

Is about what the market has grown.

Stephen E. Budorick: Thanks for taking the question. I guess I'm just going back to some of the comments on cash release and spread guidance being potentially conservative in 24. But I guess, just as we think about the business over the next five years, given portfolio occupancy is at historically high levels, and given your comments on being able to push higher yields on costs on new defense and IT developments, I guess, at what point does that give you guys the ability to continue to push rents in the operating portfolio? I mean, is the zero to two, or is it called the flat mark to market, sort of a low baseline as we think about the business over the next five years? Well, do recall one of the interesting dynamics of our business is that we have embedded growth in our lease. That's why we give you the compound annual growth rate from the original lease to the renewal lease because we capture growth in all of our leases.

And if we beat it we were able to push up a little higher or not but.

It's not a measure of no growth.

A deviation of the mark to market growth from the embedded growth.

Right. So I guess the question really is like.

Over the next few years, you continue to expect that market rent growth.

Keep pace with call. It two 5% annual escalators that fair to say then.

Yeah, and remember the two 5% escalators generates a higher growth and two 5%.

Because two 5% on a gross rent.

With expense stop.

<unk>.

Allows us to pass through increases of expenses.

The average of two 5% on the gross rents.

Stephen E. Budorick: And the mark to market is really on the renewal rate, is that are we a little below the market growth and rent, or are we a little above? And the zero guidance says internal growth. We expect it to be about what the market has grown, and if we beat it, we were able to push it up a little higher or that but it's not a measure of no growth. It's a measure of the deviation of the mark to market growth from the embedded.

<unk> 32345.

Compound growth over the term depending on the length.

Great I appreciate the comments Steve.

Thanks.

As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press Star One again. Our next question comes from Steve <unk> with Evercore ISI. Your line is open.

Stephen E. Budorick: Right, I guess the question really is like, Over the next few years, you continue to expect that market rent growth, and we'll keep pace with what's called the 2.5% annual estimate. Is that fair to say, then?

Great. Thanks, good afternoon.

Dylan Brzezinski: Yeah, and remember the 2.5% escalator generates higher growth than 2.5% because two and a half percent on a gross rent, with an expense stop which allows us to pass through increases in expenses. So the average of two and a half percent on the gross rent produces 3.2 to 3.45 percent compound growth over the term, depending on the length.

Steve I think in your prepared remarks, you guys talked about the lease up.

'twenty 100, L Street, which I know is kind of in the noncore nondefense bucket.

Where does that fit in terms of potential disposition candidates in 'twenty four.

That'll be market dependent so Brett <unk>.

Alluded to.

More news that can be positive.

And the leasing front.

And I think if we.

Dylan Brzezinski: Great. Appreciate the comments, Steve. Thanks. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced.

We're able to achieve really alluded to.

Occupancy will be positioned well.

Well for a disposition.

Then it's a question of what is the capital market look like to bring that asset to market.

Steve Sackwa: To withdraw your question, please press star 1-1 again. Our next question comes from Steve Sackwa with Evercore ISI. Your line is open.

Currently our belief is there is very little demand for investment in <unk>.

Even a trophy asset like this there's a lot of uncertainty around interest rates and what the fed's going to do because of that were expected have been delayed I think so.

Stephen E. Budorick: Great, thanks. Steve, I think in your prepared remarks, you guys talked about the lease up. 2100, or the Non-Defense IT Bucket, you know, where does that sit in terms of potential disposition candidates in 2015? That'll be market-dependent, so Britt alluded to some more news that could be positive. On the leasing front, And I think if we're able to achieve what he alluded to, the occupancy will be positioned well for a disposition, and then it's a question of what the capital market looks like to bring that asset to market. Currently, our belief is there's very little demand for investment in even a trophy asset like this. There's a lot of uncertainty around interest rates and what the Fed is going to do. The cuts that were expected have been delayed.

It's a difficult backdrop for investors to move ahead.

But I will say, we will maintain a very nimble position and when the market supports that efficient sale, we intend so.

Great and then on the data center shells, you basically said you've got no land I think and no starts penciled in just how are you thinking about that business at this point with kind of the major customer you have are you looking for additional sites outside of Northern Virginia.

And a core market that you had or.

You sort of kind of that whole business is on hold and how do you think about the retention of that business long term if it if it doesn't grow from here.

Stephen E. Budorick: I think that creates a difficult backdraft for investors to move ahead. But I will say we will maintain a very nimble position, and when the market supports an efficient sale, we intend to sell it. Great. And then on the data center shelves, you basically said you've got no land, I think, and no starts penciled in. How are you thinking about that?

So we are working actively to find additional opportunities to develop.

Our market is further impaired by a lack of clarity of power availability.

And so until there is clarity power.

And then from that demand.

Stephen E. Budorick: kind of major customers, looking for additional sites outside of the Corp market that you had or. So I think sort of that whole business is on hold, and what do you think about... So, we are working actively to find additional opportunities to develop. However, our market is further impaired by a lack of clarity on power availability. And so until there's clarity and power, and then from that, demands. We just have to be an observer of the conditions, looking for opportunities to move forward when conditions will allow us to do so. Well, maybe ask a little differently.

We just have to be an observer of the conditions.

Looking for opportunities.

Moving forward when conditions will allow us to do a lease.

Well, maybe asked a little differently are you kind of locked in to the one submarket or one area, where you develop with them or could that sort of expand geographically within the broader Virginia market.

I think he could expand can't tell you that we're actively working on expansion.

We haven't yet seen the demand spill into the collar counties.

More affordable land and quite a bit of it.

Stephen E. Budorick: Are you kind of locked into the one sub-market or one area where you've developed with them? Or could that sort of expand geographically? I think you could expand. I can't tell you that we're actively working on expanding. We haven't yet seen the demand spill into the collar counties, which have more affordable land and quite a bit of it, primarily because power is still the constraint on the market.

Primarily because the power is still good.

The constraint in the market.

Great that's it for me thanks.

Concludes our question and answer session I will now turn the call back to Mr. <unk> for closing remarks.

Thank you all for joining the call today and the great questions.

And our offices are please coordinate through Venkat, if you would like follow up call. Thank you.

Thank you for your participation and the cops defense properties fourth quarter and full year 2023 results Conference call. This concludes the presentation. You may now disconnect good day.

Steve Sackwa: That's it for me. Thanks. This concludes the question and answer session. I will now turn the call back to Mr. Budorick for closing remarks. Thank you all for joining the call today and for the great questions. We're in our offices, so please coordinate through Venkat if you'd like a follow-up call. Thank you. Thank you for your participation in the COPS Defense Properties fourth quarter and full year 2023 results conference call. This concludes the presentation. You may now disconnect. Good day, www.globalonenessproject.org

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